China's economy is marching past the global slump with expected growth of 8 per cent or more this year, as the government presses domestic consumption to pick up the slack from sluggish exports.
But long-lasting economic success remains uncertain. Behind the headline GDP number, crosscurrents are shaping the next phase of China's fast-growing economy. While rising domestic consumption is offsetting the cooled export market, heavy government stimulus spending continues to be the main driver of industrial investment, and fears of overcapacity are mounting.
Third-quarter GDP growth numbers released yesterday show that China's 4-trillion-yuan stimulus package has taken hold: Gross domestic product growth jumped to 8.9 per cent year-on-year in the third quarter, and to 7.7 per cent for the year to date, fuelled by domestic consumption and major government spending.
Chinese officials said the "remarkable" economic recovery means China is almost certain to reach, if not exceed, its target of 8-per-cent GDP growth in 2009.
Government figures show that of this year's 7.7 per cent growth to date, 7.3 per cent comes from investment and another 4 per cent from consumption. Falling exports have taken away 3.6 per cent.
The data do not separate public from private investment, and part of the growth can be attributed to strong property sales. But economists say a majority of current investment is the result of government-ordered spending.
Some of the rise in consumption can also be attributed to government initiatives including rebate programs for new cars and household appliances. Such rebates are an example of a feverish campaign by the government to urge people to buy Chinese products and support the domestic economy, as exports continue to meet with cool demand in many major markets.
Anticipating the shift, China's toy makers are an example of the increasing focus on domestic demand.
After a devastating pre-Christmas season last year, when orders from abroad slumped and some 53 per cent of toy exporters closed their doors, the Yiwu Toy Federation, representing dozens of manufacturers in Zhejiang province, decided on a dramatic new direction.
Its general secretary, Tony Yuanzhi, set up a consulting firm to help the companies adjust to selling their toys at home instead. Two months later, they have one direct-sales branch and 10 affiliated stores, with plans to expand. As a result, surviving toy firms are becoming less dependent on foreign customers - exactly what Chinese policy makers have been trying to achieve for months.
"Yiwu's toy factories have turned a lot of their attention from export to the domestic market this year," Mr. Yuanzhi said in a telephone interview from the toy-manufacturing centre, three hours south of Shanghai.
Although exports have not recovered to where they were before last year's crash, he said, more orders from Africa and South America are balancing out the continued decline from Europe and North America.
Chinese bank loans so far this year to date have topped 8.7 trillion yuan ($1.27-trillion U.S.) and this week the country's top banking regulator, Liu Mingkang, warned banks to prepare for policy changes on lending, following earlier warnings to tighten their lending criteria given the large numbers already on their books.
Estimates that as much as 88 per cent of China's GDP growth comes from government spending are in the ballpark, said Brian Jackson, the Hong Kong-based senior strategist for Royal Bank of Canada. "They pushed a lot of money outside the door."
From now until year's end, the numbers suggest good news for China's manufacturers and entrepreneurs. What isn't known is how long the government can continue to fuel the economy at such speed, with strain already beginning to show.
Earlier this week, authorities announced a ban on investment in six sectors - steel, cement, flat glass, coal chemicals, polysilicon and wind power equipment - in an effort to stop regional officials from plowing money into industry at the expense of affordable housing, infrastructure and rural development. A government statement this week warned of "serious problems of overcapacity and redundant construction" in many sectors.
"The government is attempting to stem the rise in overcapacity, but this will be hampered by its inability to remove stimulus measures, given that the economy is so dependent on them. It is still difficult to see an export rebound as demand in developed markets is yet to recover," wrote Alaistair Chan, an associate economist with Moody's Economy.com.
Compounding the challenge is that such overcapacity is not uniform across the country. On the east coast, where manufacturers and shippers are traditionally based, even a dramatic recovery in demand for Chinese exports now might not be enough to swallow stockpiles of steel and concrete. But in the underdeveloped central and western regions, projects such as better roads and railways are still genuinely needed.
"That's the complication of central planning: You've got someone in Beijing trying to make decisions based on imperfect information," said Ken Peng, a Beijing-based economist with Citigroup. "As we get out of this and trade comes back, maybe not as good as before but better than this year, I think that will absorb some of that overcapacity."
Most economists suggest the stimulus package will keep China's economy growing at around 9 per cent for at least the next six months, after which officials believe exports will recover enough to make up the gap.
"It's a question of how much longer they can continue spending at this pace," said Mr. Jackson at RBC. "There's plenty of roads and bridges and railways they can continue building for quite a long period of time, but that does raise concerns about spending being wasted."
Increase in Chinese industrial production in September, year on year.
Increase in Chinese auto sales in September, compared with same month in 2008.
Value, in yuan, of Chinese bank loans so far this year (equivalent to $1.27-trillion U.S.), an increase of 5.2 trillion yuan over same period last year.Report Typo/Error
Follow us on Twitter: